Question 1

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A) True 
 B)False  True

Question 2

If a stock is purchased for $25 per share and held one year,during which time a $1.75 dividend is paid and the price climbs to $29.5,the nominal rate of return is:

Accepted Answer

A)  13.00%. 
B)  14.00%. 
C)  20.00%. 
D)  25.00%. 
A)  13.00%. 
B)  14.00%. 
C)  20.00%. 
D)  25.00%. D

Question 3

Real rates of return will be positive as long as:

Accepted Answer

A)  the nominal return is positive. 
B)  the inflation rate is positive. 
C)  the nominal return exceeds the inflation rate. 
D)  the inflation rate exceeds the real return. 
A)  the nominal return is positive. 
B)  the inflation rate is positive. 
C)  the nominal return exceeds the inflation rate. 
D)  the inflation rate exceeds the real return. C

Question 4

Which of the following would you expect to represent the broadest-based index of U.S.stocks?

Accepted Answer

A)  Wilshire 5000 
B)  Dow Jones 500 
C)  Standard and Poor's Composite 
D)  Financial Times Index 
A)  Wilshire 5000 
B)  Dow Jones 500 
C)  Standard and Poor's Composite 
D)  Financial Times Index

Question 5

The risk premium that is offered on common stock is equal to the:

Accepted Answer

A)  expected return on the stock. 
B)  real rate of return on the stock. 
C)  excess of expected return over a risk-free return. 
D)  expected return on the S&P 500 index. 
A)  expected return on the stock. 
B)  real rate of return on the stock. 
C)  excess of expected return over a risk-free return. 
D)  expected return on the S&P 500 index.

Question 6

Why does diversification reduce risk?

Accepted Answer

The standard deviation of returns is gen

Question 7

If one portfolio's variance exceeds that of another portfolio,its standard deviation will also be greater than that of the other portfolio.

Accepted Answer

A) True 
 B)False

Question 8

The variance of an investment's returns is a measure of the:

Accepted Answer

A)  volatility of the rates of return. 
B)  probability of a negative return. 
C)  historic return over long periods. 
D)  average value of the investment. 
A)  volatility of the rates of return. 
B)  probability of a negative return. 
C)  historic return over long periods. 
D)  average value of the investment.

Question 9

The idea that investors in common stock may expect a lower total return when prices are relatively stable suggests that:

Accepted Answer

A)  investors are irrational. 
B)  risk premiums may have a normal magnitude. 
C)  real rates of return will be lower during periods of price stability. 
D)  stocks should be avoided when inflation is low. 
A)  investors are irrational. 
B)  risk premiums may have a normal magnitude. 
C)  real rates of return will be lower during periods of price stability. 
D)  stocks should be avoided when inflation is low.

Question 10

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index.

Accepted Answer

The Dow Jones Industrial Average contain

Question 11

If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%,then the inflation rate was:

Accepted Answer

A)  1.89%. 
B)  7.55%. 
C)  8.00%. 
D)  9.12%. 
A)  1.89%. 
B)  7.55%. 
C)  8.00%. 
D)  9.12%.

Question 12

What is the expected return on a portfolio that will decline in value by 13% in a recession,will increase by 16% in normal times,and will increase by 23% during boom times if each scenario has equal likelihood?

Accepted Answer

A)  8.67% 
B)  13.00% 
C)  13.43% 
D)  17.33% 
A)  8.67% 
B)  13.00% 
C)  13.43% 
D)  17.33%

Question 13

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

Accepted Answer

A)  2 
B)  5 
C)  20 
D)  50 
A)  2 
B)  5 
C)  20 
D)  50

Question 14

Risk factors that are expected to affect only a specific firm are referred to as:

Accepted Answer

A)  market risk. 
B)  diversifiable risk. 
C)  systematic risk. 
D)  risk premiums. 
A)  market risk. 
B)  diversifiable risk. 
C)  systematic risk. 
D)  risk premiums.

Question 15

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Accepted Answer

A)  Inflation increased more than the real return. 
B)  Nominal returns actually decreased. 
C)  Nominal returns increased more than inflation. 
D)  Nominal returns increased less than inflation. 
A)  Inflation increased more than the real return. 
B)  Nominal returns actually decreased. 
C)  Nominal returns increased more than inflation. 
D)  Nominal returns increased less than inflation.

Question 16

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100% as it is to provide a 100% loss?

Accepted Answer

A)  0% 
B)  50% 
C)  71% 
D)  100% 
A)  0% 
B)  50% 
C)  71% 
D)  100%

Question 17

Which statement is correct concerning macro risk exposure?

Accepted Answer

A)  All firms face equal macro risk exposure. 
B)  Only portfolios of stocks face macro risk exposure. 
C)  Macro risk exposure affects the cost of capital. 
D)  Macro risk exposure is less important to diversified investors than micro risk exposure. 
A)  All firms face equal macro risk exposure. 
B)  Only portfolios of stocks face macro risk exposure. 
C)  Macro risk exposure affects the cost of capital. 
D)  Macro risk exposure is less important to diversified investors than micro risk exposure.

Question 18

Treasury bonds have provided a higher historical return than Treasury bills,which can be attributed to:

Accepted Answer

A)  greater default risk. 
B)  a higher level of unique risk. 
C)  greater price risk due to longer maturities. 
D)  the fact that they are less frequently traded than bills. 
A)  greater default risk. 
B)  a higher level of unique risk. 
C)  greater price risk due to longer maturities. 
D)  the fact that they are less frequently traded than bills.

Question 19

Recent surveys of financial economists and chief financial officers have suggested an average risk premium of 5.4 to 6.4%.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following security portfolios should offer the highest maturity premium?

Accepted Answer

A)  Common stocks, because they never mature. 
B)  Long-term Treasury bonds, because of potential fluctuations in interest rates. 
C)  Treasury bills, because of fluctuations in inflation rates. 
D)  The Dow, because it is the oldest and most stable index. 
A)  Common stocks, because they never mature. 
B)  Long-term Treasury bonds, because of potential fluctuations in interest rates. 
C)  Treasury bills, because of fluctuations in inflation rates. 
D)  The Dow, because it is the oldest and most stable index.

Exam 11: Introduction to Risk,Return,and the Opportunity Cost of Capital

A market index is used to measure performance of a broad-based portfolio of stocks.

If a stock is purchased for $25 per share and held one year,during which time a $1.75 dividend is paid and the price climbs to $29.5,the nominal rate of return is:

Real rates of return will be positive as long as:

Which of the following would you expect to represent the broadest-based index of U.S.stocks?

The risk premium that is offered on common stock is equal to the:

Why does diversification reduce risk?

If one portfolio's variance exceeds that of another portfolio,its standard deviation will also be greater than that of the other portfolio.

The variance of an investment's returns is a measure of the:

The idea that investors in common stock may expect a lower total return when prices are relatively stable suggests that:

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index.

If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%,then the inflation rate was:

What is the expected return on a portfolio that will decline in value by 13% in a recession,will increase by 16% in normal times,and will increase by 23% during boom times if each scenario has equal likelihood?

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

Risk factors that are expected to affect only a specific firm are referred to as:

How is it possible for real rates of return to increase during times when the rate of inflation increases?

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100% as it is to provide a 100% loss?

Which statement is correct concerning macro risk exposure?

Treasury bonds have provided a higher historical return than Treasury bills,which can be attributed to:

Recent surveys of financial economists and chief financial officers have suggested an average risk premium of 5.4 to 6.4%.

Which of the following security portfolios should offer the highest maturity premium?

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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